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6 Factors that Affect Stock Prices in India
! Last updated on November 2, 2018 | " by Research Desk
#
Here are the 6 Factors that Affect Stock Prices in India:
$

The unstable stock prices makes equity investing risky. The

risk averse escape the stock market. While the risk seekers
invest eagerly in equity for goal achievement.

In fact, volatility carries the essence of stock market

returns. The fluctuations enable real price discovery. The
risk seeker gets fair returns for the higher risk. An increase
in stock price increases investors’ net worth.

On the whole, equity investing isn’t for the weak-hearted.

It’s for those who understand the investor sentiment. It’s for
those who know why stock prices follow a particular
pattern. One needs to  recognize price determinants as
also identify inter-relationships.

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Each news and update results in  a rise/fall in the stock

prices. Good news boosts investor sentiments causing the
stock prices to rise. Whereas, any setbacks dampens their
hopes causing a price decline. There are a number of
factors which affect stock prices.

Some factors are firm-specific like a change in

management, new product launch, policy change, legal
tangles, etc. Others factors are like political, economic, and
technological that cause variation in stock prices.

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Eventually any event that alters the value of the company

impacts its stock prices. If the company becomes more
valuable, then its stock prices increase. Any event that
erodes company’ value causes stock prices to sink.

Let’s have an in-depth look into determinants of stock

prices:

Firm-related factors
Any change in the company attribute makes its stock
prices volatile. Increased sales revenue, fall in the cost of
operations, product launch, repayment of debt, etc.
increases future cash flows of the company. Investors
develop an optimistic outlook towards the company.
Demand for shares of the company grows. Hence, positive
factors lead to a rise in stock prices.

Negative factors constitute product failures, change in top

management, high employee turnover, high
manufacturing cost, fall in sales revenue, etc. It adversely
impacts company’s productivity and future earnings.
Investors abandon shares of the loss-making company. It
results in fall in the stock prices of the company.

Also read:  7 behavioural biases affecting investor

returns

Monetary Policy of RBI

RBI reviews its monetary policy every couple of months.
Any increase/decrease in Repo and Reverse Repo rates
changes the stock prices. Under a hawkish stance, RBI
raises the key policy rates. It reduces the liquidity in the
banks. This makes borrowing costlier for them. They, in
turn, increase the lending rates. It makes borrowing more
expensive for the business. The firm may face difficulties in
servicing its existing debt obligations as well.

Investors perceive it as an impediment in expansionary

activities of business. They start offloading the shares of
the company which reduces its stock prices.

A reverse of this happens when RBI follows a dovish

monetary policy. Banks tend to decrease the lending rates.
This leads to credit expansion. Investors perceive as a
positive sign. Stock prices automatically start rising.

Exchange Rates
The exchange rates of Indian Rupee keeps fluctuating vis-
à-vis other currencies. When rupee hardens in respect to
other currencies, it sets a multidimensional chain reaction.
It causes Indian goods to become expensive in foreign
markets. Companies drastically affected are the ones
involved in overseas operations.

Companies dependent on exports experience a fall in

demand for their goods abroad. Revenue from exports
decline, and stock prices of such companies in the home
country fall. Importing companies, on the hand, are
benefitted by hardening of the rupee. They need to shell
out lesser on imported goods which reduce the cost of
operations. It, in turn, increases their bottom-line along
with raising their share prices.

Softening of rupee vis-à-vis, other currencies triggers

entirely opposite effect. In this, the stock price of exporters
rises whereas those of importers fall.

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Politics
Political events, especially during the prime ministerial
elections, influence Indian stock markets considerably.
Before the elections, there’s tremendous volatility in the
market. A rise or fall depends on expectations of the voters
from the government. A coalition outlook accompanies
bear runs in stock prices. On the contrary, full majority
outlook makes the market bullish. During the recent PM
elections, people pinned up high hopes with Modi
government. Markets rallied in the pre-election period
which continued even after Modi’s win.

The agenda of political parties also affect the direction of

stock prices. A development agenda results in market
exuberance. Conversely, an undefined and weak political
manifesto makes the stock prices to slide.

Additionally, political instability, the imposition of embargo,

war-like situation, and civil riots may cause the stock
prices to go southwards.

Natural Disasters
Any natural calamity wrecks havoc on the stock markets.

The frequency and severity of the disasters like droughts,

floods, earthquakes, etc. have grown manifold. These not
only result in human displacement but also lead to asset
destruction. It retards the pace of economic growth of the
country. It may push individuals into poverty thereby
affecting consumption and investment. Revenue of
companies takes a hit due to drop in sales volumes.
Consequently, future cash flows may fall and expansion
activities may take a standstill.

The occurrence of Natural disasters, thus, results in fall in

the stock prices of companies.

Gold Prices & Bonds

No established theory expresses the relationship between
prices of stocks and gold & bonds. Before the financial
crisis of 2008, a negative correlation was observed
between the two. While stocks are risky instruments, gold
and bonds are regarded as a safe investment havens. Till
2008, a rise in gold price was accompanied by a slump in
stock prices and vice-versa.

After 2008, as the equity markets recovered, returns from

gold have remained stable. On the contrary, stock prices
have maintained an upward journey. However, you may
witness an intermittently increased preference for gold
and bonds during uncertainties.

Take the pre-election period in India, the demonetization

or US presidential elections, investors were flocking
towards safer havens. As a result, gold and bond prices
surged while the stock prices continued to decline.

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Final Words

Stock prices of a company may rise/fall due to different

factors. Ideally, you need to know relationships between
stock prices and other variables. It would ensure that you
stay at an advantage owing to market volatility.

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